Health Coverage: All in the Family

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The Patient Protection and Affordable Care Act generally requires companies to expand health-care coverage; namely, to employees’ adult children up to age 26 who were not previously eligible. But some firms are making their lists and checking them twice before signing off on extending more benefits.

Pretzel maker Snyder’s of Hanover, for one, conducted what’s known as a dependent eligibility audit last fall. “We wanted to make sure that the dependents on our plan were truly eligible,” says Penny Opalka, director of health and retirement at Snyder’s, which has since merged with snack maker Lance.

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While Snyder’s was unable to track the net savings — since the audit coincided with the company’s open-enrollment period, in which some changes would happen anyway — Opalka says she knows of several employees who voluntarily dropped their dependents as a result. Another employee got legally married in order to keep her common-law spouse on the plan.

In fact, “over half of the savings” from dependent eligibility audits generally comes from eliminating former spouses of employees who have been divorced, or partners whom employees never legally married, says Michael Smith, CEO of Consova, a firm that specializes in such audits. “Lawyers often put in divorce decrees that one spouse has to provide health insurance for the other, but the company doesn’t have to provide that,” notes Smith. Former stepchildren, and older children who have aged out of a parent’s plan, are also among those who usually drop off.

The audit process typically requires all employees to submit proof of their relationship to anyone covered by a plan, in the form of marriage certificates for spouses and birth certificates for children. In some cases, tax-return forms may also be required.

Usually, says Smith, an audit will find that between 7% and 10% of employee dependents are ineligible; that’s down from 11% to 13% prior to health-care reform. A company can expect to save between 3% and 5% of its health-care costs by weeding out ineligible dependents, down from a high of 6% before reform. Smith says his business is up from last year, a trend he expects to continue through 2011.

An additional benefit of an eligibility audit is that the paperwork generated is kept on file for the future, should questions arise or legal requirements change. Nissan North America conducted such an audit several years ago when it consolidated four U.S. divisions into one. Some 900 people dropped off during the preaudit amnesty period, and another 1,200 were eliminated during the audit, creating a $2.1 million annual savings for the automaker, which had about 23,000 employees and dependents at the time of the audit. “It wasn’t easy for employees, but it should help them in the long term,” says Marlin Chapman, director of compensation and benefits for Nissan North America. “Now we have all files stored electronically, so if we do another audit down the road, it won’t have the same volume.”

While CFOs may be wary of how employees might respond to such demands for personal paperwork, Opalka of Snyder’s says that “surprisingly, we did not have any employees who gave us grief about this.” She attributes that to early communication — the company told employees the previous year that it would be conducting the audit — as well as the fact that such audits are becoming more commonplace at other companies. As Snyder’s works on integrating with Lance, Opalka expects to discuss doing an audit of the consolidated entity.

What employers shouldn’t expect, however, is to recoup any costs from employees who were in violation. “Most employers don’t go after people who are out of compliance,” says Smith. “There’s a question of how far you go back, and how to handle it if they haven’t incurred any claims. It really creates a lot of headaches if the employer takes that route.”